The Labour party has for a long time been fearful about high government borrowing to fund additional public investment. It didn’t start with 2010 austerity. Gordon Brown, probably the best Chancellor the UK has had over the last 50 years, used PFI mainly as a way of getting public investment done without additional public sector borrowing. It didn’t make economic sense at the time, as public borrowing is normally a far cheaper way of financing investment, but it happened because increasing government debt to finance worthwhile public investment was seen as toxic.
In parts 1-3 of this series we have outlined how none of this perceived toxicity stands up to economic scrutiny. It makes no sense to say that the country cannot afford to borrow to invest more, because government debt is also an asset for those who hold it (part 1). How much government borrowing costs depends on expectations of future short term interest rates, not on how much it is borrowing (part 2). The Eurozone crisis of 2010-2 has no relevance to the UK because we have a central bank that will in practice act as a buyer of last resort for government debt, just as it did after the Global Financial Crisis, at the start of the pandemic and in the latter stages of the Truss debacle.
Those who say that the Truss crisis shows that Labour needs to tread cautiously in raising borrowing to invest have to address why Truss provoked a crisis, but all the many other occasions that UK borrowing has risen didn’t. In part 3 we showed why the key mistake that Truss made was to leave open how she intended to cut public spending, at a time when further cuts to spending were politically incredible. But
